PARAGUAY

The central bank’s policies have gained credibility by taming inflation and anchoring expectations through inflation targeting (4% target since 2017). Moreover, since passing the Fiscal Responsibility Law in 2013, the government has showed restraint in public spending. However, due to the Covid-19 related crisis, the fiscal deficit reached -7.8% in 2020 and should slowly reduce in 2021 (-4.9%) and 2022 (-3.4%). Public debt also rose from 26.1% in 2019 to 35.5% in 2020 and is expected remain around 35% in 2021 and 2022.

Paraguay’s current account balance remains stable, with a slight deficit of -0.7% in 2020 that should come back to equilibrium in 2021 before turning slightly positive in 2022 (0.5%). Yet export dependency on primary commodities remains very high (agricultural commodities represented roughly 46% of the country’s exports in 2018) and Paraguay’s real effective exchange rate correlates largely with commodity prices. Foreign currency reserves cover about 9 months of imports (up from around 5 months in 2013), providing an external liquidity buffer. 

The government led by Mario Abdo Benitez pursues pro-market policies enacted by the former head of government Horacio Cartes to lower taxation and attract FDIs. Its main challenges include the fight against the Paraguayan People’s Army insurgents (landless peasants occupying farms), corruption and a weak public health system.